The end of Chinese Manufacturing and the Rebirth of the UK and the USA

In the past decade, manufacturing of all sorts, especially for low-priced, low margin goods, has been moving to China. Companies like Dyson and Marks and Spencer were amongst many Western companies who took advantage of the Chinese manufacturing boom. Lured by subsidies, cheap labour, and lax regulations and rigging its currency, China was able to seduce companies to relocate their manufacturing operations there. Millions of jobs were lost in the UK and the USA as China was able to produce everything so cheaply, at prices that Western countries just couldn’t match. However, in the future, it is clear, that with rising debt problems of its own, China will be unable to afford these bribes. But, there is also short-term problems that are creating challenges that China might not be able to spend its way out of. The threat to China is real: a manufacturing bubble. This presents an opportunity to the UK and the US that we must take.

Rising labour costs, concerns over government-sponsored intellectual property theft, and production time lags are already leading to companies such as Dow Chemicals, Caterpillar, GE, and Ford to start moving some manufacturing back to the U.S. from China. Google has recently announced that its new Nexus Q streaming media player would also be made in the US, following a decision from Apple to open a factory in Texas to produce the operating chips for its iPhone and iPad devices. Many UK companies are doing the same thing, while others are also considering the change.

Cost is one part of the issue. Companies moved to take advantage of the low cost, which allowed them to increase profits or decrease the price and move into new markets. In the years since, subsidies have dropped; transport costs have soared and wages for Chinese workers have increased. For example, in the past year, wages for Foxconn workers have increased by 25%. This is only going to increase further, and combined with lower productivity in China, the gap between Western countries and China is decreasing by the day. Western staff tend to have a longer attention span and are able to focus for a longer period of time; whereas in China they tend to work for longer hours but don’t tend to do as many products per hour. The lower labour cost used to make up for this, but with the difference in labour costs getting smaller, Chinese productivity hasn’t increased to match the rise, so the cost per unit is rising in China. Therefore, the attraction of lower production costs is clearly decreasing.

At the same time, the lack of a reliable Chinese legal system is leading to problems. Some of this is sponsored by the government, and is forcing firms to reconsider their position in the country. Companies like BMW, Ford and Mercedes have all been taken advantage of, with Chinese companies creating blatant copies of cars like the Mini, produced by BMW. Western companies try to do something about it, with the local courts are biased, favouring local companies, pushed by the government, so that even the most extreme cases will always fail. Companies that used to customers of Western firms, manufacturing products for them and sharing trade secrets, are now seeing these used against them, with partners turning into rivals. This has been seen recently in the chemical industry, with battles between SI Group, an American company, and Sino Legend, a Chinese company, over production of resins used in tyres. Other companies are also involved in similar cases, with Chinese courts even rejecting evidence and judgements made by European authorities.

At the same time, if the Western companies do manage to win, the damages awarded aren’t usually enough to even cover the cost of the trial. Yet, the biggest threat is the lack of opacity. Judges will often just publish simple rulings, not giving the reasons for their decisions. This also makes it easier for the courts to be biased and unfair. As a result, IP in China is worth half that of the same IP in the UK or the United States. However, the much bigger threat is that of a partner using your secrets and designs to produce something similar or exactly the same, with little chance of a successful appeal. Just like cost, this is also pushing foreign companies away from China.

With this in mind, we should now be looking to take advantage of this. Companies would clearly consider moving back to the UK or USA, so the government needs to act now. What should they do?

They need to take advantage of technology, particularly robots, to aid production, which would actually lead to lower production costs in China. Robots are now able to preform surgery, milk cows and even fly fighter jets, all while getting cheaper. Robots can easily do the same assembly that the Chinese labour is currently doing. It would be a big initial cost in supplying these to firms, but that could be paid back in tax or even in repayments. Companies have no problem with paying the cost back, it’s just difficult to an expensive one-off cost. It might not lead to the jobs that we lost over the past decade been replaced, but it would replace a few. It would also lead to new jobs in other areas, and new industries.

Tesla, the manufacturer of the Tesla car, takes advantage of this, with production in the heart of Silicon Valley, one of the most expensive places in the United States. It might not provide as many jobs as car production did 20 years ago, but at least the production is domestic, and it creates supply chain jobs in the local area. It also enables products to be exported to other places, again benefitting the country.

If there isn’t a company that can produce these machines in the UK, this should also be funded by the government, creating a new private company that can lead the world in the future of manufacturing. It would be very popular, able to service the machines sold to UK companies, and export them worldwide, to places like the United States, that would also benefits from moving production back from China. We have some of the best engineers located in the UK, so it’s certainly possible.

So, China has reasons to worry. The things that used to entice companies into the country no longer exist, as the country cannot afford to keep on throwing money at it, while at the same time, new problems that cannot be solved by money are springing up, with problems over IP theft, biased courts and rising costs. This presents an opportunity to the UK and the USA, as production can be moved back, with the aid of machines. Governments need to act, with production vastly benefiting the economy. It might not replace all the old jobs, but it will provide some, while also providing tax revenue and creating new billion dollar industries. Manufacturing will move back to the Western world eventually, as it gets more local due to things like 3D printers, but the sooner we can do it, the better. Governments have the chance to be remembered as doing something positive, creating a policy that will shape the future, but are they bold enough to do it?